Trumponomics: A Danger to Prosperity?

A pre-election
analysis by The Economist found Hillary
Clinton’s fiscal plan to be “fiddly” but Trump’s to be “absurd.” Ironically,
both candidates shared a common ground in their agendas: an expansionary fiscal
plan to splash more red ink in public finance. The Economist reports that during Barack Obama’s presidency, the US
national debt spiked from 35 percent of GDP to over 70 percent of GDP. It is
estimated that Clinton’s plan would continue this trend to inflate the national
debt-to-GDP ratio above 85 percent while Trump’s would make it even higher to
105 percent of GDP in ten years.

The
two candidates also shared the same aim of beefing up America’s decaying
infrastructure. The Clinton agenda promised an extra USD 275 billion over five
years to return infrastructure investment near to its pre-recession level. The Trump
Infrastructure Plan is more ambitious by pledging to fill up the USD 1
trillion funding gap in infrastructure investment over next ten years.

Why
this shared fiscal aggressiveness? The current phase of economic expansion is
in its 89th month since June 2009, making it one of the
longest continuous growth periods in US history. The growth has, however,
been slow and feeble. The per capita real GDP in 2015 was only 3 percent higher
than its pre-recession level. The post-recession GDP growth in the past eight
years has been 1.8 percent per annum, well below the annual rates of 2.65 percent
in 2000-07 and 2.26 percent in 1981-99. Although unemployment rate has fallen
from its recessionary peak 9.6 percent down to around 5 percent this year, it
is still higher than the 4.6 percent level in 2006-07. More alarmingly, the
employment-to-population ratio, currently about 59 percent, is way below the 63
percent level before 2008. The 4-percentage-point difference suggests that as
many as 10 million jobless people could have been employed if the economy had
recovered to the pre-recession status.

All
those figures indicate that the US economy is yet to regain its full strength. When
the economy is stuck below its long-run potential, the wisdom of Keynesian
economics calls for government intervention. Eight years ago, the world avoided
a Great Recession of the scale and length of the 1930s largely thanks to a
globally coordinated intervention through massive fiscal pump priming and aggressive
monetary loosening by the major economies. Despite that success, the US and other
OECD economies are still languishing with economic frailty today.
Frustratingly, their central banks have exhausted their monetary-policy
ammunition. With policy interest rates near or even below zero bound, these
economies are helplessly swamped in the liquidity trap. That leaves fiscal
policy the only option.

The real danger of Trumponomics is thus not a fiscal fiasco that
fails to create jobs and promote growth. The more worrying is the long-run environmental
costs of a free-fracking pursuit of GDP growth.

As
pointed out by Gavyn
Davies of Financial Times, the
intellectual climate in macroeconomics is shifting in favor of a “New View” for
a fiscal policy that is more active and audacious. Advocates for such a “New View”
include eminent economists affiliated with the Democrat campaign. They believe
that the historically low levels of long-term interest rates make it less
costly to raise public debt, leaving more room for deficit-financed government
spending.

The
bet on further fiscal pump priming has an additional shot of odds from the
so-called Verdoorn’s
Law, named after a Dutch economist who first coined the idea decades ago. Verdoorn’s
Law suggests a positive causal relationship from the growth of output to the
growth of productivity in the long run. According to that causality, the fiscal
stimulus, in addition to returning the economy to full employment, may also boost
productivity growth. Some recent work in the field provides renewed support to
this notion. Paul
Beaudry and Franck Portier, for instance, hypothesize the positive shock
from the anticipation of a future productivity advance on current aggregate
expenditure, including investment. In this scenario of expectation-drive
business cycles, public investment in infrastructure that benefits future
productivity growth would double its effectiveness via its added fillip to
business investment.

These
“new views” are of course not without controversy among economists. They nevertheless lend support to the claim that a colossal fiscal
expansion is just what it needs to bring the US economy back to the pre-recession
growth trend, or an even faster one, i.e. to “make America great again.”

Apart
from its larger scale, a key feature that distinguishes Trump’s fiscal plan from
Clinton’s is its massive tax reduction and simplification, especially the lowering
of business tax rate from 35 percent to 15 percent. The sweeping tax cuts are
likely to repeat the feat of Reaganomics in the 1980s: soaring budget deficit and
public debt, as well as surging productivity growth on the supply side. Lifting
regulatory restrictions on the energy industry and shaking away US
responsibilities in the fight against global warming will certainly make that
job easier.

The
real danger of Trumponomics is thus not a fiscal fiasco that fails to create
jobs and promote growth. The more worrying is the long-run environmental costs
of a free-fracking pursuit of GDP growth. Shadows of damaging trade wars also
loom large over the president-elect’s ambition to rebalance the US trade with
the rest of the world. Can a shrewd billionaire-turned-President see these
dangers?